UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

Commission File Number 01-12846

PROLOGIS

(303) 375-9292
(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year,
if changed since last report)

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing for the past 90 days.

Yes þ No o

     Indicate by check mark whether the registrant is accelerated filer (as defined in Rule 12b-2 of the Securities Act of 1934).

Yes þ No o

     The number of shares outstanding of the Registrant’s common shares as of May 5, 2005 was 186,666,413.

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INDEX

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PROLOGIS

CONSOLIDATED CONDENSED BALANCE SHEETS
(In thousands, except share data)

The accompanying notes are an integral part of these Consolidated Condensed Financial Statements.

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PROLOGIS

CONSOLIDATED CONDENSED STATEMENTS OF
EARNINGS AND COMPREHENSIVE INCOME
(Unaudited)
(In thousands, except per share data)

(Continued)

The accompanying notes are an integral part of these Consolidated Condensed Financial Statements.

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PROLOGIS

CONSOLIDATED CONDENSED STATEMENTS OF
EARNINGS AND COMPREHENSIVE INCOME (CONTINUED)
(Unaudited)
(In thousands, except per share data)

The accompanying notes are an integral part of these Consolidated Condensed Financial Statements.

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PROLOGIS

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)

See Note 12 for information on non-cash investing and financing activities and other information.

The accompanying notes are an integral part of these Consolidated Condensed Financial Statements.

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PROLOGIS

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
March 31, 2005 and 2004
(Unaudited)

1. General:

     Business

     ProLogis (collectively with its consolidated subsidiaries and partnerships “ProLogis”) is a publicly held real estate investment trust (“REIT”) that owns, operates and develops (directly or through unconsolidated investees) industrial distribution properties in North America, Europe and Asia. ProLogis has elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended (the “Code”).

     ProLogis’ business consists of two reportable business segments: property operations and the corporate distribution facilities services business (“CDFS business”). The property operations segment represents the long-term ownership, management and leasing of industrial distribution properties. The CDFS business segment primarily encompasses ProLogis’ development of industrial distribution properties that are either contributed to an unconsolidated property fund in which ProLogis has an ownership interest and acts as manager, or sold to third parties. Additionally, ProLogis will acquire industrial distribution properties that are generally rehabilitated and/or repositioned in the CDFS business segment prior to being contributed to a property fund. See Note 11.

     Basis of Presentation

     ProLogis’ Consolidated Condensed Financial Statements are prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). ProLogis and its subsidiaries are included in the accompanying Consolidated Condensed Financial Statements and are presented in ProLogis’ functional currency, the U.S. dollar. All entities that ProLogis controls, either through ownership of a majority voting interest or otherwise, or entities in which ProLogis is the primary beneficiary, are consolidated. All material intercompany transactions with consolidated entities have been eliminated.

     The Consolidated Condensed Financial Statements of ProLogis as of March 31, 2005 and for the three months ended March 31, 2005 and 2004 are unaudited and, pursuant to the rules of the U.S. Securities and Exchange Commission (the “SEC”), certain information and footnote disclosures normally included in financial statements have been omitted. Management of ProLogis believes that the disclosures presented in these financial statements are adequate. However, these interim Consolidated Condensed Financial Statements should be read in conjunction with ProLogis’ December 31, 2004 audited Consolidated Financial Statements contained in ProLogis’ 2004 Annual Report on Form 10-K/A#1.

     The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of income and expenses during the reporting period. Although these estimates and assumptions are based on current expectations, actual results could differ from those estimates and assumptions.

     Certain amounts included in ProLogis’ Consolidated Condensed Financial Statements for the prior period have been reclassified to conform to the 2005 financial statement presentation.

2. Keystone Transaction:

     On May 3, 2004, ProLogis and affiliates of four investment funds managed by Eaton Vance Management (the “Fund Affiliates”) established five property funds (the “Acquiring Property Funds” and also referred to by ProLogis as ProLogis North American Properties Funds VI, VII, VIII, IX and X-see Note 5). ProLogis has a 20% ownership interest in each of the Acquiring Property Funds with the remainder owned by the Fund Affiliates. Also on May 3, 2004, ProLogis and the Acquiring Property Funds entered into an agreement to acquire the outstanding equity of

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Keystone Property Trust (“Keystone”), a publicly traded REIT, and the operating units of Keystone Operating Partnership, L.P., a subsidiary of Keystone. Keystone owned and leased industrial distribution properties located in New Jersey, Pennsylvania, Indiana, Florida, South Carolina and Ohio. The acquisition of Keystone by ProLogis and the Acquiring Property Funds was approved by Keystone’s shareholders on July 30, 2004 and was closed on August 4, 2004.

3. Relocation:

     ProLogis has relocated its information technology and corporate accounting functions from El Paso, Texas to Denver, Colorado and is moving its Denver corporate headquarters. The relocation from El Paso was completed in the first quarter of 2005. The relocation to the new corporate headquarters, which is located in Denver and is currently under development, is expected to be completed by the end of 2005.

     For the three months ended March 31, 2005, ProLogis recognized total relocation expenses of $2.8 million, including $0.6 million of employee termination benefits, $0.5 million of accelerated depreciation associated with non-real estate assets whose useful life has been shortened due to the relocation plans and $1.7 million of costs associated with the hiring and training of new personnel and other costs, including travel and temporary facility costs. ProLogis began the relocation process in the second quarter of 2004.

4. Real Estate:

Real Estate Assets

     Real estate assets directly owned by ProLogis primarily consist of income producing industrial distribution properties, industrial distribution properties under development and land held for future development of industrial distribution properties. ProLogis’ real estate assets, presented at cost, include the following as of the dates indicated (in thousands of U.S. dollars):

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     ProLogis directly owns real estate assets in North America (United States, Mexico and Canada), Europe (France, United Kingdom, Poland, Netherlands, Italy, Germany, Spain, Czech Republic, Sweden, Hungary and Belgium) and Asia (Japan, China and Singapore). No individual market in any country, as defined by ProLogis and presented in Item 2 of ProLogis’ 2004 Annual Report on Form 10-K/A #1, represents more than 10% of ProLogis’ total real estate assets, before depreciation.

     In conjunction with ProLogis’ development activities, during the three months ended March 31, 2005 and 2004, ProLogis capitalized interest of $12.4 million and $7.4 million, respectively.

Operating Lease Agreements

     ProLogis leases its operating properties to customers under agreements that are generally classified as operating leases. At March 31, 2005, minimum lease payments, excluding expense recoveries from customers, on leases with lease periods greater than one year for space in ProLogis’ directly owned properties for the remainder of 2005 and the other years in the five-year period ending December 31, 2009 and thereafter are as follows (in thousands of U.S. dollars):

     For ProLogis’ directly owned properties, the largest customer and the 25 largest customers accounted for 1.25% and 16.01%, respectively, of ProLogis’ annualized collected base rents at March 31, 2005.

5. Unconsolidated Investees:

Summary of Investments and Income

     Since 1997, ProLogis has invested in various entities in which its ownership interest is less than 100% and in which it does not have control as defined under GAAP. Accordingly, these investments are presented under the equity method in ProLogis’ Consolidated Condensed Financial Statements. Certain of these investments were originally structured such that ProLogis’ ownership interest would allow ProLogis to continue to comply with the requirements of the Code to qualify as a REIT. However, with respect to ProLogis’ investments in property funds, having an ownership interest of 50% or less is part of ProLogis’ business strategy.

     ProLogis’ investments in and advances to entities that are accounted for under the equity method are summarized by type of investee as follows as of the dates indicated (in thousands of U.S. dollars):

     ProLogis recognizes income or losses from its investments in unconsolidated investees consisting of its proportionate share of the earnings or losses of these investees and interest income on advances made to these investees, if any. Further, ProLogis earns fees for providing services to the property funds. The amounts recognized by ProLogis from its investments in unconsolidated investees are summarized as follows for the periods indicated (in thousands of U.S. dollars):

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Property Funds

     Contributions of developed properties to a property fund allow ProLogis to realize, for financial reporting purposes, a portion of the profits from its development activities while at the same time allowing ProLogis to maintain a long-term ownership interest in its developed properties. This business strategy also provides liquidity to fund ProLogis’ future development activities and generates fee income to ProLogis. ProLogis has investments in 15 property funds with ownership interests in these property funds ranging from 11.4% to 50% at March 31, 2005. The property funds own operating properties that have generally been contributed to them by ProLogis, although certain property funds have also acquired properties from third parties and in the case of ProLogis North American Property Funds VI through X, the funds also acquired assets in the Keystone Transaction. ProLogis receives ownership interests in the property funds as part of the proceeds of contributions of properties to the property funds. ProLogis recognizes its proportionate share of the earnings or losses of each property fund. ProLogis earns fees for acting as the manager of each of the property funds and manager of the fund properties, and may earn additional fees by providing other services to certain of the property funds including, but not limited to, acquisition, development and leasing activities performed on their behalf.

     ProLogis’ investments in the 15 property funds, presented under the equity method, were as follows as of the dates indicated (in thousands of U.S. dollars):

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     ProLogis’ investments in the 15 property funds at March 31, 2005 consisted of the following components (in millions of U.S. dollars):

     The aggregate amount recognized by ProLogis related to the property funds, including ProLogis’ proportionate share of net earnings or losses, interest income on advances, if any, and fees earned for services were as follows for the periods indicated (in thousands of U.S. dollars):

	•	Began operations on August 26, 1999;
	•	Members are ProLogis (50%) and New York State Common Retirement Fund (50%);
	•	Owned 81 properties aggregating 14.2 million square feet at March 31, 2005;

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	•	All but three of the properties owned were contributed by ProLogis or were developed by ProLogis on behalf of the property fund;
	•	Properties are located in the Los Angeles Basin market; and
	•	Property management, asset management, leasing and other fees recognized by ProLogis were $1.0 million and $0.9 million for the three months ended March 31, 2005 and 2004, respectively.

(2)	ProLogis North American Properties Fund I LLC (“ProLogis North American Properties Fund I”):

	•	Began operations on June 30, 2000;
	•	Members are ProLogis (41.3%) and State Teachers’ Retirement System of Ohio (58.7%);
	•	Owned 36 properties aggregating 9.4 million square feet at March 31, 2005;
	•	All properties were contributed by ProLogis;
	•	Properties are located in 17 markets in the United States; and
	•	Property management, asset management, leasing and other fees recognized by ProLogis were $0.6 million for both the three months ended March 31, 2005 and 2004.

(3)	ProLogis First U.S. Properties LP (“ProLogis North American Properties Fund II”):

	•	Began operations on June 30, 2000;
	•	Partners are ProLogis (20%) and an affiliate of First Islamic Investment Bank E.C. (“First Islamic Bank”) (80%);
	•	Owned 27 properties aggregating 4.5 million square feet at March 31, 2005;
	•	All properties were contributed by ProLogis;
	•	Properties are located in 13 markets in the United States; and
	•	Property management, asset management, leasing and other fees recognized by ProLogis were $0.6 million for both the three months ended March 31, 2005 and 2004.

(4)	ProLogis Second U.S. Properties LP (“ProLogis North American Properties Fund III”):

	•	Began operations on June 15, 2001;
	•	Partners are ProLogis (20%) and an affiliate of First Islamic Bank (80%);
	•	Owned 34 properties aggregating 4.4 million square feet at March 31, 2005;
	•	All properties were contributed by ProLogis;
	•	Properties are located in 15 markets in the United States; and
	•	Property management, asset management, leasing and other fees recognized by ProLogis were $0.5 million for both the three months ended March 31, 2005 and 2004.

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(5)	ProLogis Third U.S. Properties LP (“ProLogis North American Properties Fund IV”):

	•	Began operations on September 21, 2001;
	•	Partners are ProLogis (20%) and an affiliate of First Islamic Bank (80%);
	•	Owned 17 properties aggregating 3.5 million square feet at March 31, 2005;
	•	All properties were contributed by ProLogis;
	•	Properties are located in 10 markets in the United States; and
	•	Property management, asset management, leasing and other fees recognized by ProLogis were $0.3 million for both the three months ended March 31, 2005 and 2004.

(6)	ProLogis North American Properties Fund V:

	•	Began operations on March 28, 2002;
	•	Ownership interests of the ProLogis-Macquarie Fund at March 31, 2005 are held directly or indirectly by ProLogis, Macquarie ProLogis Trust (“MPR”), a listed property trust in Australia and Macquarie Bank Limited (“Macquarie Bank”);
	•	MPR’s effective ownership interest in the ProLogis-Macquarie Fund was 85.9% at March 31, 2005 through its 96.3% weighted ownership interest in two entities that collectively owned 89.2% of the ProLogis-Macquarie Fund. MPR’s effective ownership interest in the ProLogis-Macquarie Fund was 83.1% at March 31, 2004;
	•	ProLogis’ effective ownership interest in the ProLogis-Macquarie Fund was 11.4% at March 31, 2005 based on its 10.8% direct ownership interest in the ProLogis-Macquarie Fund and its 0.7% ownership interest in two entities that collectively own 89.2% of the ProLogis-Macquarie Fund. ProLogis’ effective ownership interest in the ProLogis-Macquarie Fund was 14.0% at March 31, 2004;
	•	Macquarie Bank’s effective ownership interest in the ProLogis-Macquarie Fund was 2.7% at March 31, 2005 based on its 3.0% ownership interest in two entities that collectively own 89.2% of the ProLogis-Macquarie Fund. Macquarie Bank’s effective ownership interest was 2.9% at March 31, 2004;
	•	ProLogis and a United States subsidiary of Macquarie Bank each have a 50% ownership interest in a company that was formed to act as manager of the ProLogis-Macquarie Fund;
	•	ProLogis refers to the combined entities in which it has ownership interests (ProLogis-Macquarie Fund and the management company) as one property fund named ProLogis North American Properties Fund V. ProLogis’ combined ownership interest in this property fund has ranged from 11.4% to 16.9% since the property fund’s inception;
	•	ProLogis reduced its ownership interest in the ProLogis-Macquarie Fund in June 2004 by exchanging a portion of its investment into units of MPR as allowed under certain formation agreements. Upon receipt of the units of MPR, ProLogis sold them in the public market. The sale generated net proceeds of $13.2 million. ProLogis recognized a net gain on the disposition of the investment of $3.3 million;
	•	Owned 128 properties aggregating 31.0 million square feet at March 31, 2005 (including nine properties aggregating 2.7 million square feet that have been contributed by ProLogis during 2005);
	•	All but seven of the properties owned were contributed by ProLogis;

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	•	Properties are located in 24 markets in the United States and four markets in Mexico;
	•	At March 31, 2005, ProLogis had guaranteed $105.4 million of borrowings of ProLogis North American Properties Fund V. ProLogis provided this guarantee on short-term borrowings of the property fund associated with the acquisition of properties from ProLogis. The borrowings that are guaranteed mature in July 2005. On May 5, 2005, ProLogis North American Properties Fund V entered into an interest rate lock agreement for a secured loan of $150 million. ProLogis expects that the proceeds of this secured debt financing, which will not be guaranteed by ProLogis and is subject to customary due diligence, will be used to repay these borrowings.
	•	ProLogis North American Properties Fund V has the right of first offer to all of ProLogis’ stabilized development properties that ProLogis desires to sell in North America through the end of 2005. Properties subject to the right of first offer must meet certain specified criteria, including leasing criteria. ProLogis cannot predict the extent to which ProLogis North American Properties Fund V will have funds available to continue to acquire properties from ProLogis during 2005. Should ProLogis North American Properties Fund V choose not to acquire, or not have sufficient capital available to acquire, a property that meets the specified criteria, its rights under the agreement will terminate; and
	•	Fees recognized by ProLogis were (in millions of U.S. dollars):

(7)

These property funds, originally formed on May 3, 2004 to acquire properties as part of the Keystone Transaction described in Note 2, each began operations on June 30, 2004 when ProLogis contributed properties to each property fund. The remainder of the properties were acquired as part of the Keystone Transaction. The ownership interests in each property fund are held by ProLogis (20%) and an affiliate of an investment fund managed by Eaton Vance Management (80%). ProLogis earns fees for providing property management, asset management, leasing and certain other services to the property funds. Other information about these property funds as of and for the three months ended March 31, 2005 is as follows:

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(8)	ProLogis North American Properties Fund XI:

	•	Ownership interest in existing property fund acquired by ProLogis on August 4, 2004 as part of the Keystone Transaction;
	•	Partners are ProLogis (20%) and AFL-CIO Building Investment Trust (80%);
	•	Owned 14 properties aggregating 4.3 million square feet at March 31, 2005;
	•	Properties are located in three markets in the United States; and
	•	Property management fees recognized by ProLogis were $0.4 million for the three months ended March 31, 2005.

(9)	ProLogis North American Properties Fund XII:

	•	Ownership interest in existing property fund acquired by ProLogis on August 4, 2004 as part of the Keystone Transaction;
	•	Partners are ProLogis (20%) and CalEast Industrial Investors, LLC (80%);
	•	Owned 12 properties aggregating 3.4 million square feet at March 31, 2005;
	•	Properties are located in two New Jersey markets; and
	•	Property management fees recognized by ProLogis were $0.3 million for the three months ended March 31, 2005.

(10)	ProLogis European Properties Fund:

	•	Began operations on September 23, 1999;
	•	ProLogis and 21 third parties, primarily institutional investors, own units in the property fund. ProLogis European Properties Fund has equity commitments from nine investors through subscription agreements aggregating 636.6 million euro (the currency equivalent of approximately $845.3 million at March 31, 2005) of which 345.8 million euro (the currency equivalent of approximately $459.1 million at March 31, 2005) was unfunded at March 31, 2005. The subscription agreements expire on August 29, 2006;
	•	At March 31, 2005, ProLogis was committed to make additional equity contributions to ProLogis European Properties Fund of 135.4 million euro (the currency equivalent of approximately $179.8 million as of March 31, 2005) through September 15, 2009;
	•	Owned 234 properties aggregating 48.7 million square feet at March 31, 2005 (including five properties aggregating 0.9 million square feet that were contributed by ProLogis during the first quarter of 2005);
	•	Acquired a 0.2 million square foot property from a third party and disposed of a 0.1 million square foot property to a third party during the first quarter of 2005;
	•	Properties have been contributed by ProLogis (187 properties, 37.3 million square feet) and acquired from third parties (47 properties, 11.4 million square feet);
	•	Properties are located in 26 markets in 11 countries in Europe;

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	•	ProLogis is committed to offer to contribute all of the properties that it develops and stabilizes in specified markets in Europe through September 2019 to ProLogis European Properties Fund, subject to the property meeting certain leasing and other criteria;
	•	ProLogis’ ownership interest was 21.2% and 22.6% at March 31, 2005 and 2004, respectively; and
	•	Property management, asset management and other fees recognized by ProLogis were $7.4 million and $6.3 million for the three months ended March 31, 2005 and 2004, respectively.

(11)	PLD/RECO Japan TMK Property Trust (“ProLogis Japan Properties Fund”):

	•	Began operations on September 24, 2002;
	•	Partners are ProLogis (20%) and a real estate investment subsidiary of the Government of Singapore Investment Corporation (“GIC”) (80%);
	•	The total capital commitment by the real estate investment subsidiary of GIC to the property fund is $300.0 million, of which $119.3 million was unfunded at March 31, 2005;
	•	Owned 14 properties aggregating 4.5 million square feet at March 31, 2005 (including one property aggregating 0.6 million square feet that was contributed by ProLogis during the first quarter of 2005);
	•	Eight of the 14 properties owned by the property fund were contributed by ProLogis;
	•	Properties are located in three markets in Japan;
	•	ProLogis is committed to offer to contribute all of the properties that it develops and stabilizes in Japan through June 2006 to ProLogis Japan Properties Fund, subject to the property meeting certain leasing and other criteria; and
	•	Property management and asset management fees recognized by ProLogis were $1.0 million and $0.6 million for the three months ended March 31, 2005 and 2004, respectively.

(12)	Under GAAP, a portion of the proceeds resulting from ProLogis’ contribution of a property to a property fund is deferred due to ProLogis’ continuing ownership in the property fund that acquires the property. The amount of the proceeds that ProLogis defers in computing the gain on the contribution is recorded as a reduction to ProLogis’ investment in the property fund that acquires the property. The proceeds that have not been recognized are recognized as ProLogis adjusts its proportionate share of the earnings or loss of the property fund, recognized under the equity method, to reflect lower depreciation expense within the property fund. The lower depreciation expense is the result of ProLogis’ reduced investment in the property fund and, accordingly, its lower basis in the contributed property. The proceeds not already recognized through these adjustments to earnings are recognized in results of operations by ProLogis if the property fund disposes of a property to a third party that was originally contributed to the property fund by ProLogis, in addition to ProLogis’ proportionate share of the net gain or loss recognized by the property fund. ProLogis also recognizes gains associated with the previously deferred proceeds in amounts proportionate to reductions in its ownership interest in the property fund after the contribution is made. If a loss results when a property is contributed to a property fund, the entire loss is recognized.
(13)	Includes costs associated with ProLogis’ investment in the property fund, ProLogis’ proportionate share of the accumulated other comprehensive income or loss recognized by ProLogis European Properties Fund (cumulative translation adjustments and hedge accounting adjustments) and ProLogis Japan Properties Fund (cumulative translation adjustments) and settlement amounts either paid or received associated with the interest rate swap agreements and a related indemnification agreement between ProLogis and ProLogis North American Properties Funds VI through X.

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     ProLogis, from time to time, enters into Special Limited Contribution Agreements (“SLCA”) in connection with certain of its contributions of properties to certain of its property funds. Under the SLCAs, ProLogis is obligated to make an additional capital contribution to the respective property fund under certain circumstances, the occurrence of which ProLogis believes to be remote. Specifically, ProLogis would be required to make an additional capital contribution to the property fund if the property fund’s third-party lender, whose loans to the property fund are generally secured by the property fund’s assets and are non-recourse, does not receive a specified minimum level of debt repayment. However, the proceeds received by the third-party lender from the exhaustion of all of the assets of the property fund combined with the debt repayments received directly from the property fund will reduce ProLogis’ obligations under the SLCA on a dollar-for-dollar basis. ProLogis’ potential obligations under the respective SLCAs, as a percentage of the undepreciated book value of the assets in the property funds, range from 2% to 28%. Accordingly, the value of the assets of the respective property funds would have to decline by between 98% and 72% from the book value before ProLogis would be required to make an additional capital contribution. ProLogis believes that the likelihood of declines in the values of the assets that support the third-party loans of the magnitude necessary to require an additional capital contribution is remote, especially in light of the geographically diversified portfolios of properties owned by the property funds. Accordingly, these potential obligations have not been recognized as a liability by ProLogis at March 31, 2005 and ProLogis has assessed a nominal value to the obligation undertaken through the SLCAs. The potential obligations under the SLCAs aggregate $404.8 million at March 31, 2005 and the combined book value of the assets in the property funds, before depreciation, that are subject to the provisions of the SLCAs was approximately $6.8 billion at March 31, 2005.

     In August 2003, ProLogis entered into an indemnification agreement with ProLogis European Properties Fund whereby ProLogis indemnifies ProLogis European Properties Fund for certain future capital gains tax liabilities that could be incurred by ProLogis European Properties Fund associated with contributions of properties to ProLogis European Properties Fund after March 31, 2003. ProLogis’ contributions to ProLogis European Properties Fund are structured as contributions of the shares of companies that own the real estate assets. Accordingly, the capital gains tax liability associated with the step up in the value, if any, of the underlying real estate assets is deferred and transferred to ProLogis European Properties Fund at contribution. ProLogis has indemnified ProLogis European Properties Fund to the extent that ProLogis European Properties Fund: (i) incurs capital gains tax as a result of a direct sale of the real estate asset, as opposed to a transaction in which the shares of the company owning the real estate asset are transferred or sold or (ii) is required to grant a discount to the buyer of shares under a share transfer transaction as a result of ProLogis European Properties Fund transferring the embedded capital gain tax liability to the buyer of the shares in the transaction. Further, if an initial public offering of units in ProLogis European Properties Fund is undertaken, ProLogis has indemnified the unit holders of ProLogis European Properties Fund in the event the unit holders are required to accept a discount to the value of their units because the capital gain tax liability is being transferred to the holders of units in the new public entity. The agreement limits the amount that is subject to ProLogis’ indemnification with respect to each property to 100% of the actual capital gains tax liability that is deferred and transferred by ProLogis to ProLogis European Properties Fund at the time of the initial contribution. Pursuant to the indemnification agreement, ProLogis has recognized a deferred income tax liability of $16.3 million associated with the contributions of 51 properties to ProLogis European Properties Fund during the period from April 1, 2003 through March 31, 2005.

     In June 2004, ProLogis entered into an indemnification agreement with ProLogis North American Properties Fund V whereby ProLogis indemnifies ProLogis North American Properties Fund V for certain future capital gains tax liabilities that could be incurred by ProLogis North American Properties Fund V associated with the contribution of assets located in Mexico. ProLogis’ contributions of properties located in Mexico to ProLogis North American Properties Fund V are structured as contributions of the shares of companies that own the real estate assets. Accordingly, the capital gains tax liability in Mexico associated with the step up in the value, if any, of the underlying real estate assets is deferred and transferred to ProLogis North American Properties Fund V at contribution. ProLogis has indemnified ProLogis North American Properties Fund V to the extent that ProLogis North American Properties Fund V incurs capital gains tax in Mexico as a result of a sale of the real estate asset or an interest in the real estate asset. The agreement limits the amount that is subject to ProLogis’ indemnification with respect to each property located in Mexico to the lesser of (i) the actual capital gains tax paid in Mexico upon the sale of the real estate assets or (ii) 100% of the capital gains tax liability in Mexico that is deferred and transferred by ProLogis to ProLogis North American Properties Fund V at the time of the initial contribution. Pursuant to the indemnification agreement, ProLogis has recognized a deferred income tax liability of $4.4 million associated with

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the contributions of 22 properties located in Mexico to ProLogis North American Properties Fund V during the period from March 28, 2002 through March 31, 2005.

     Summarized financial information of the property funds as of and for the three months ended March 31, 2005 is presented below (in millions of U.S. dollars). The information presented is for the entire entity, not ProLogis’ proportionate share of the entity.

Other Investees

     At March 31, 2005, ProLogis had investments in six entities that perform some of ProLogis’ CDFS business activities (the “CDFS Joint Ventures”) and certain other companies that are not included in one of ProLogis’ two reportable business segments.

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      ProLogis’ investments in these companies were as follows as of the dates indicated (in thousands of U.S. dollars):

6. Discontinued Operations:

     Discontinued operations represent a component of an entity that has either been disposed of or is classified as held for sale if both the operations and cash flows of the component have been or will be eliminated from ongoing operations of the entity as a result of the disposal transaction and the entity will not have any significant continuing involvement in the operations of the component after the disposal transaction. The assets and liabilities of the component of the entity that has been classified as discontinued operations are presented separately in the balance sheet and the results of operations of the component of the entity that has been classified as discontinued operations are reported as discontinued operations in the statement of earnings.

Assets Held For Sale

     The net assets of ProLogis’ temperature-controlled distribution operations in France that are classified as held for sale consisted of the following at March 31, 2005 (in thousands of U.S. dollars):

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     These operations in France that are classified as held for sale generated a net loss of $11.4 million for the three months ended March 31, 2005. This loss includes an impairment charge of $13.1 million that was recognized to reflect the carrying value of these assets at their estimated fair value less costs to sell, based on a binding offer received during 2005.

Assets Disposed Of

     Properties disposed of to third parties are considered to be discontinued operations unless ProLogis developed such properties under a pre-sale agreement. Properties that ProLogis contributes to property funds in which ProLogis maintains an ownership interest and acts as manager are not considered to be discontinued operations due to ProLogis’ continuing involvement with the properties.

     During the period prior to the contribution or sale but after the completion of CDFS business activities (development, rehabilitation or repositioning), ProLogis includes CDFS business assets in its operating portfolio and as a part of the property operations segment. These assets do not generally meet the criteria to be classified as held for sale or as discontinued operations. See Note 11.

     ProLogis disposed of five properties during the three months ended March 31, 2005 that met the criteria to be presented as discontinued operations, and recognized net gains of $1.8 million associated with these dispositions. Of the five properties disposed of during 2005, one property was a CDFS business asset. This property generated an aggregate net loss of $0.4 million from aggregate net disposition proceeds of $2.9 million. The remaining four properties disposed of in 2005 were held and used in ProLogis’ property operations segment. The dispositions of these properties generated an aggregate net gain of $2.2 million from aggregate net disposition proceeds of $6.9 million. In addition, ProLogis disposed of 20 properties (ten of which were CDFS business assets) during 2004.

     The operating amounts attributable to the properties disposed of in either 2005 or 2004, that are presented as discontinued operations (other than the amounts recognized upon disposition) are as follows for the periods indicated, (in thousands of U.S. dollars):

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7. Shareholders’ Equity:

Common Shares

     ProLogis had 186,410,059 and 185,788,783 of ProLogis’ common shares of beneficial interest, par value $0.01 per share (“Common Shares”) outstanding at March 31, 2005 and December 31, 2004, respectively.

     ProLogis sold or issued Common Shares under certain Common Share plans, including share-based compensation plans during the three months ended March 31, 2005, as follows:

	•	1999 Dividend Reinvestment and Share Purchase Plan, amended in November 2002 (the “1999 Common Share Plan”): Allows holders of Common Shares to automatically reinvest Common Share distributions and certain holders and persons who are not holders of Common Shares to purchase a limited number of additional Common Shares by making optional cash payments, without payment of any brokerage commission or service charge. Common Shares that are acquired under the 1999 Common Share Plan, either through reinvestment of distributions or through optional cash payments, are acquired at a price ranging from 98% to 100% of the market price of such Common Shares, as determined by ProLogis. ProLogis generated net proceeds of $12.4 million from the issuance of 323,000 Common Shares during the three months ended March 31, 2005 under the 1999 Common Share Plan.
	•	Long-term incentive plan (the “Incentive Plan”) and Share Option Plan for Outside Trustees (the “Outside Trustees Plan”): Certain employees and members of ProLogis’ Board of Trustees (the “Board”) participate in these share- based compensation plans that provide compensation, generally in the form of Common Shares. There are an aggregate of 22,600,000 Common Shares (190,000 of which are allocated to the ProLogis 401(k) Plan and Trust) that have been made available for award under the Incentive Plan, of which 4,171,000 Common Shares were available for future awards at March 31, 2005 (3,981,000 under the Incentive Plan and 190,000 that are allocated to the 401(k) Plan and Trust). There are an aggregate of 500,000 Common Shares that have been made available under the Outside Trustees Plan of which 282,000 Common Shares are available for future awards at March 31, 2005. Under the Incentive Plan and the Outside Trustees Plan, the exercise of share options and other share awards generated net proceeds to ProLogis of $1.5 million from the issuance of 287,000 Common Shares during the three months ended March 31, 2005.

     Limited partnership units were converted into 11,000 Common Shares during the first three months of 2005.

8. Distributions and Dividends:

Common Share Distributions

     Distributions of $0.37 per Common Share for the first quarter of 2005 were paid on February 28, 2005 to holders of Common Shares on February 15, 2005. Quarterly Common Share distributions paid in 2005 are based on the annual distribution level for 2005 of $1.48 per Common Share (as compared to $1.46 per Common Share in 2004) set by the Board in December 2004. The payment of Common Share distributions is subject to the discretion of the Board and is dependent upon ProLogis’ financial condition and operating results, and may be adjusted at the discretion of the Board during the year.

Preferred Share Dividends

     The annual dividends on ProLogis’ cumulative redeemable preferred shares of beneficial interest (“Preferred Shares”) are $4.27 per share (Series C) and $1.6875 per share (Series F and Series G). On March 31, 2005, ProLogis paid quarterly dividends of $1.0675 per share (Series C) and $0.4219 per share (Series F and Series G). Such dividends are payable quarterly in arrears on the last day of March, June, September and December. Dividends on Preferred Shares are payable when, and if, they have been declared by the Board, out of funds legally available for the payment of dividends.

     Pursuant to the terms of its Preferred Shares, ProLogis is restricted from declaring or paying any distribution with respect to its Common Shares unless and until all cumulative dividends with respect to the Preferred Shares

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have been paid and sufficient funds have been set aside for dividends that have been declared for the then-current dividend period with respect to the Preferred Shares.

9. Earnings Per Common Share:

     Reconciliations of the numerator and denominator used to calculate basic net earnings attributable to Common Shares per share to the numerator and denominator used to calculate diluted net earnings attributable to Common Shares per share for the periods indicated are as follows (in thousands of U.S. dollars, except per share amounts):

10. Long-Term Compensation:

     ProLogis recognizes the costs of its share-based compensation plans under the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation”, that allow ProLogis to continue to account for these plans using Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees”, and related interpretations. Under APB No. 25, if the exercise price of the share options granted equals or exceeds the market price of the underlying share on the date of grant, no compensation expense is recognized. SFAS No. 123 requires that the fair value of the share options granted be recognized as compensation expense, regardless of the relationship of the exercise price to the market price. ProLogis grants share options to employees and members of its Board that have an exercise price that is equal to the average of the high and low market prices on the day the options are granted. Therefore, no compensation expense is recognized. ProLogis recognizes compensation expense if the terms of the share options or other instruments awarded are changed in such a manner that the variable accounting rules as provided in APB No. 25 become applicable.

     Had ProLogis recognized compensation expense for the three months ended March 31, 2005 and 2004 using an option valuation model as provided in SFAS No. 123, its net earnings attributable to Common Shares would have changed as follows (in thousands of U.S. dollars, except per share amounts):

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     Since share options vest over several years and additional grants are likely to be made in future years, the pro forma compensation expense used in the presentation above may not be representative of compensation expense to be expected in future years. There were no option grants during the three months ended March 31, 2005.

     On December 16, 2004, the Financial Accounting Standards Board issued SFAS No. 123R, “Share Based Payment” which requires ProLogis and other public companies to measure the cost of employee services received in exchange for an award of an equity instrument based on the award’s fair value on the grant date. The cost of these awards will be recognized over the period during which an employee is required to provide service in exchange for the award, generally the vesting period. In addition, a public company will measure the cost of employee services received in exchange for an award of liability instruments at its initial fair value, which will subsequently be remeasured at each reporting period. Changes in fair value during the service period will be recognized as compensation expense over that period. SFAS No. 123R is effective for ProLogis beginning in the first quarter of 2006, however, early adoption is allowed. ProLogis is currently evaluating the impact the adoption of SFAS No. 123R will have on its financial position and its results of operations.

11. Business Segments:

     ProLogis has two reportable business segments:

	•	Property operations — representing the long-term ownership, management and leasing of industrial distribution properties, either directly or through investments in unconsolidated property funds in which ProLogis has an ownership interest and acts as manager. Each operating property and each investment in a property fund is considered to be an individual operating segment having similar economic characteristics that are combined within the reportable segment based upon geographic location. ProLogis’ operations in the property operations business segment are in North America (the United States and Mexico), Europe (primarily through its investment in ProLogis European Properties Fund which operates in 11 countries, primarily France and the United Kingdom), and Asia (Japan, primarily through its investment in ProLogis Japan Properties Fund, and Singapore).
	•	CDFS business — representing the development, acquisition and rehabilitation and/or acquisition and repositioning of industrial distribution properties with the intent to contribute the properties to unconsolidated property funds in which ProLogis has an ownership interest and acts as manager or to sell the developed properties to third parties. Additionally, ProLogis includes the fees earned for development activities on behalf of customers or third parties. Dispositions of land parcels when ProLogis’ development plans no longer include the development of the parcels are also included in this reportable segment. The separate activities in this segment are considered to be individual operating segments having similar economic characteristics that are combined within the reportable segment based upon geographic location. ProLogis’ CDFS business segment operations are in North America (the United States, Mexico and Canada), in 11 countries in Europe (France, United Kingdom, Poland, Netherlands, Italy, Germany, Spain, Czech Republic, Sweden, Hungary and Belgium) and in Asia (Japan, China and Singapore).

     The assets of the CDFS business segment generally include properties under development and land held for development. During the period between the completion of development, rehabilitation or repositioning of a

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property and the date the property is contributed to a property fund or sold to a third party, the property and its associated rental income and rental expenses are included in the property operations segment because the primary activity associated with the property during that period is leasing. Upon contribution or sale, the resulting gain or loss is part of the income of the CDFS business segment.

     ProLogis presents the operations and the net gains and losses associated with certain properties as discontinued operations. Accordingly, these amounts are excluded from the segment presentation. See Note 6.

     Reconciliations are presented below for: (i) each reportable business segment’s revenue from external customers to ProLogis’ total revenues; (ii) each reportable business segment’s net operating income from external customers to ProLogis’ earnings before minority interest; and (iii) each reportable business segment’s assets to ProLogis’ total assets. ProLogis’ chief operating decision makers rely primarily on net operating income and similar measures to make decisions about allocating resources and assessing segment performance. The applicable components of ProLogis’ revenues, earnings before minority interest and assets are allocated to each reportable business segment’s income, net operating income and assets. Items that are not directly assignable to a segment are reflected as reconciling items. The following reconciliations are presented in thousands of U.S. dollars: